Scott Burrill - Market Notes

Levels For Friday

Markets recovered this afternoon sending the SP500 above the Weekly Up / Down Magnet.

Heading into tomorrow with the important Employment Situation Report, the option implied move through Friday's close is + / - 9.5 points.

Volatility has relaxed with the VVIX closing down 2.38% to 95.83. This is still elevated though and we note the increase in the SP500 daily ranges, currently running about 17 points.

Our work is picking up increasing volatility at lower time resolutions. Whether instability leads to propagation to higher time resolutions such as Daily, Weekly and then Monthly timeframes is an open question. But, we note the more favorable (meaning greater ranges) trading environment across the board.

Bias is Up > 2635.

Speaking of Volatility, and notably Animal Spirits, I wanted to take a walk on the wild side as questions and conversations around Bitcoin have picked up. Even my realtor is looking at accepting Bitcoin for transactions. I'm all in favor of Fintech disrupting real estate, but this sounded like a bell being rung to me.

Anyway, I am adding Bitcoin to the mix of instruments I will monitor with the imminent launch of futures trading, first on the CBOE and then the CME. With futures, we anticipate options and potentially other vehicles such as ETFs.

Today is unique since it's rare to see an asset crash to the Upside as Bitcoin did today.

Like many in this industry, I have long been aware of cryptocurrency.

I much prefer some of Bitcoin's crypto competitors for their more practical smart contract capabilities, and distributed ledger technology.

I don't view this as a stable store of value, but versions to come may certainly be. But, with the CBOE and CME throwing their weight behind them with derivatives trading, and the growing interest, questions and conversations, I thought it time to formalize my approach since it is merely an extension of our process already.

My interest in cryptocurrency began years ago and the Blockchain (the database behind bitcoin) intrigued me so much so that I spent months researching distributed ledger technology and Blockchain applications, ultimately delivering a keynote address at our Financial Technology Symposium a few years back.

I'm not new to this asset class.

Turning to our metrics, that are well-grounded in academic and economic rationale, we lean on the nature of the buyers and sellers to glean whether informed money is selling out to lesser informed hot money, as well as an ensemble of metrics that tilt slightly to the predictive.

When I snapped Bitcoin's price data from bitstamp (this is one of exchanges) and read it through our tools in a matter of seconds, the Informed Liquidity Ratio was a modest 52.5% BUY. This is in-line demand and nowhere near the 66% BUY recently observed in Financials (XLF) on the news of Tax Relief. There is no divergence between price and demand according to our models.

‍

Assigning value to an instrument such as Bitcoin is out of the scope of this exercise. In fact, as you can see from the Bloomberg screen grab, the values vary significantly from exchange-to-exchange. For anyone used to efficient markets, low transaction costs, and stable market structure, this arena is comparatively the Wild West. But, that too will change.

Looking at Bitcoin via logarithmic charts and 'fractally' at the daily and 78-minute level, from purely a price momentum perspective, it remains upwardly biased with price magnetized as seen in the lower panels on one of my preferred momentum tools. Looking ahead, range extension puts into play $19,674 per bitcoin, should the frenzy continue.

However, given the current daily range, late-comers will suffer tremendous heat (volatility) if caught wrong.